IN THE ITAT HYDERABAD BENCH ‘A’
Smt. Dharam Shobha Rani
IT APPEAL NOS. 72 & 454 (HYD.) OF 2012
[ASSESSMENT YEAR 2006-07]
JULY 20, 2012
Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the CIT(A)-II, Hyderabad dated 27.02.2012 for the assessment year 2006-07. The assessee also filed a Stay Application arising out of the above appeal. Since the appeal and Stay Application belong to one assessee they are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
2. The grievance of the assessee herein is with regard to non-granting of exemption u/s. 54F of the Income-tax Act, 1961.
3. Brief facts of the issue are that during the year, the assessee sold 505 square yards (sqy) out of 1516 sqy on 14.9.2005 and received sale consideration of Rs. 61,06,000. The assessee claimed deduction u/s. 54F on the capital gain of Rs. 38,03,881 as investment in house property. The Assessing Officer disallowed the above claim on the reason that the following work is pending in ground floor of the building:
(i) Electrical work is partly completed, main door and other switch boards are yet to be fixed.
(ii) Though plastering is completed painting is still in final stages.
(iii) Plumbing work is not yet completed.
(iv) The main door is in fixing stage.
(v) Other doors not yet fixed.
4. It is also noticed by the Assessing Officer that before starting of construction work of the building, the assessee not deposited the amount of capital gain in the capital gain deposit scheme as required u/s. 54(2) of the Act. On appeal, the CIT(A) confirmed the order of the Assessing Officer. Against this the assessee is in appeal before us.
5. We have heard both the sides and perused the material available on record. We have carefully gone through the judgements relied on by the assessee’s counsel in the following cases:
i. Smt. Rajneet Sandhu v. Dy. CIT  49 SOT 7/ 16 taxmann.com 210 (Chd.) (URO)
ii. Satish Chandra Gupta v. Assessing Officer  54 ITD 508 (Delhi)
iii. CIT v. Sardarmal Kothari  302 ITR 286 (Mad.)
iv. Jyoti Pat Ram v. ITO  92 ITD 423 (Luck.)
v. Saleem Fazelbhoy v. Dy. CIT  106 ITD 167 (Mum.)
vi. Gowrishanker Gupta v. Asstt. CIT  22 SOT 141 (Hyd.)
vii. Mrs. Sonia Gulati v. ITO  115 Taxman 232 (Mum.) (Mag.)
viii. Mrs. Meera Jacob v. ITO  313 ITR 411 (Ker.)
ix. Jagan Nath Singh Lodha v. ITO  148 Taxman 1 (Jodh.) (Mag.)
x. CIT v. Sambandam Udaykumar  206 Taxman 150/19 taxmann.com 17 (Kar.)
xi. Mrs. Seetha Subramanian v. Asstt. CIT  59 ITD 94 (Mad.)
6. According to the assessee the assessee purchased old building of 53 years old constructed in the year 1953 and construction includes dismantling of walls, water proofing, wall finishes, plumbing, kitchen remodelling and furnishing the bedroom to make the house habitable.
7. Now we will look into the provisions of Section 54F. Section 54F speaks of capital gain on transfer of certain capital asset not to be charged in case of investment in residential house which reads as under:
“(1) [Subject to the provisions of sub-section (4), where in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house hereinafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:”
8. By a plain reading of the above section it is evident that for claiming exemption u/s. 54F the following conditions are to be fulfilled:
(a) The assessee should be an individual or HUF;
(b) Capital gain should arise from transfer of long term capital gain;
(c) The assessee within a period of one year prior to or two years after the date of transfer of original asset, purchased a residential house property or within three years from the date of transfer of original asset constructed a residential house property within three years from the date of transfer of original asset constructed residential house property.
9. Subject to the fulfilment of the above three conditions, if the investment is more than net consideration, full capital gain is exempt, otherwise proportionate capital gain is exempt. The Department’s contention is that the assessee had not constructed a new residential house property. On the other hand, the assessee has not constructed the new residential building within the stipulated time and it is in semi finished condition and as such the assessee is not eligible for deduction u/s. 54F.
10. In the case of Saleem Fazelbhoy (supra) it was held as follows:
“The provisions of s. 54F are incentive provisions intended to augment the investment in residential houses. It is the settled legal position that incentive provisions should be construed liberally in such a manner that object of the statute is fulfilled rather than the manner which may frustrate the object. Investment in residential house would not only include cost of purchase of the house but also the cost incurred in making the house habitable. An inhabitable premises cannot be equated with a residential house. If one person cannot live in a premises, then such premises cannot be considered a residential house. In the modern age, the builder may provide semi-finished house or complete house depending upon the price agreed to between the parties. In case of semi-finished house, the purchaser will have to invest on flooring, wooden work, sanitary work, etc., to make it habitable. Therefore, the investment in house would be complete only when such house becomes habitable. Expenditure incurred on making the house habitable should be considered as investment in purchase of the house subject to the condition that payment was made during the period specified in s. 54F. There is distinction between expenditure incurred on making the house habitable and the expenditure on renovation. One may visualize a situation where assessee may buy a habitable house but the assessee may like to incur expenditure by way of renovation to make it more comfortable. He may not be happy with the quality of material used by the builder and, therefore, he may incur the expenditure on improvement of the house. Such expenditure cannot be equated with the expenditure on making the house habitable. Whether the house purchased by the assessee was in a habitable condition or not would depend on the state of condition of the house at the time of purchase. Hence, this aspect would have to be kept in mind while adjudicating such issue. In the present case, the AO as well as the learned CIT(A) had rejected the claim of the assessee on the ground that no expenditure could be considered for exemption under s. 54F which was incurred after the date of purchase. The AO had no occasion to examine the state of the condition of the house purchased by the assessee. Though the list of expenditure has been provided by the assessee, yet it is to be examined whether such expenditure was incurred to make the house habitable or just to make the house more comfortable. This aspect of the matter requires examination by the AO. Accordingly, the order of the CIT(A) is set aside and the AO is directed to readjudicate the issue in accordance with the guidelines given and after considering the entire material produced by assessee before him. The assessee shall be given proper opportunity to represent his case.”
11. In the case of Mrs. Meera Jacob (supra) it was held that since the assessee had only made addition to the plinth area which was in the form of modification of an existing house, she was not entitled to deduction claimed under section 54F of the Income-tax Act, 1961.
12. In the case of Jyoti Pat Ram (supra) it was held that the term remodelling and renovation sufficient referred to new construction also and, therefore, the assessee has to be held to have made investment in construction of residential house within the stipulated time. In principle, it is entitled for exemption u/s. 54F.
13. In the case of K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 (SC) it was held as under:
‘A statutory provision most be co construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction.”
14. Further in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 (SC) it was held as under:
“if the court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to the imposition of a penalty.”
15. Coming to the facts of the present case, the assessee having constructed the building and invested the capital gain, the assessee is entitled for deduction u/s. 54F of the Act if other conditions discussed herein below are fulfilled. In our opinion, we have to take a liberal view of the beneficial provisions of section 54F.
16. Coming to the other objection of the Assessing Officer that the amount of capital gain is invested in capital gain deposit scheme as prescribed u/s. 54(2) of the Act, the learned AR submitted that the assessee originally given advance to purchase the flat and it was not materialised. The assessee took back the advance and started construction of a building but the assessee’s return of income was not accompanied by any evidence in support of this claim. Being so, the lower authorities denied the claim of the assessee u/s. 54F of the Act. Before us, the assessee made a similar plea. The plea of the assessee is that she has given advance for purchase of flat to M/s. Sabari Constructions. Further the assessee filed a letter dated 20.12.2005 stating that the assessee has paid Rs. 2.5 lakhs by cash on 14.10.2005 and by cheque dated 9.12.2005 Rs. 25 lakhs towards purchase of flat in No. 501, Anand Plaza, situated at 6-1-1063/C, Lakdikapool, Hyderabad. Considering this plea of the assessee, we direct the Assessing Officer to examine the fact whether the amount so paid is for acquisition of flat or not and decide the issue in the light of the order of Tribunal in the case of Jagan Nath Singh Lodha (supra).
17. Since we have disposed of the appeal of the assessee, the Stay Application filed by the assessee becomes infructuous.
18. In the result, appeal of the assessee is partly allowed for statistical purposes and the Stay Application is dismissed as infructuous.